All you need to Know about Debt and Divorce


After determining custody of the children, the next big issue in every divorce is subdividing all the property and wealth accrued over time. However, on the flip side of property is debt, since debt like mortgage and auto loans, is what has been used to accumulate property.

The most common debts in Canadian families are credit card debts, mortgages, secured and unsecured Overdraft Protection Lines of Credit, car loans/leases, renovation loans, consumer loans, child support/spousal support arrears, student loans, unpaid fines and tickets, capital gains, GST, property, income, and other taxes, and personal guarantees of business debts.

Before the divorce is finalized, both parties have to decide how to share the debt. This is best done amicably, but the parties can go to court for a determination, which is particularly common with acrimonious divorce. Here is all you need to know about divorce and debt.

Why is it important I sort out my debt during the divorce process?

The way you handle debt dictates how you will start over. If you get all the debt you had accumulated as a couple, you will struggle with the next phase of your life, and vice versa. Sorting out the debt and divorce question also has an impact on your credit rating and score. A good credit rating is important even for simple things like getting a credit card and even renting an apartment. The ability of the spouses to carry the debt after divorce also influences the amount of cash that will be available for spousal and child support. Lastly, improper handling of debt can lender one or both partners bankrupt.

Who is responsible for the debt?

All creditors want to be repaid. They don’t really care who makes the repayments, as long as they are paid. For personal debt, the creditor will be looking at the person whose name is on the papers to make the repayments, but the couple can then agree who makes the repayments (or the courts if the couple does not agree), especially in cases where the debt was used for the family. In most cases, debts like student loans are paid by the person who took the loan since they have nothing to do with the other party.

How are joint debts handled during the divorce?

Unlike personal debts, joint debts are the responsibility of both parties. Joint overdraft protection, joint lines of credit, and joint credit cards will appear in the names of both parties and, therefore, both parties have to agree on how they will share the debt. If there are several such debts, an easy way of dividing them up is splitting them between the parties (instead of paying half of each debt which is hectic). However, such agreements are not binding and the lender will continue holding both parties responsible.

How are secured debts handled during the divorce?

Secured loans have assets associated with them. These can be houses (for mortgages), cars for auto loans, boats, and other assets. If one party will be taking over an asset such as a car, then the responsibility for the debt should move to that party. Given the sheer amount of debt that the parties will owe with mortgages, a popular way of dealing with this debt is selling the property and using the money to pay off the debt. There might still be an outstanding balance left to pay if the debt is new. Through mortgage refinanceyou can get rid of debt with the help of a mortgage broker in Toronto.

How are debts to family handled during a divorce?

Some spouses come out and claim that they owe money to their parents or siblings and expect this to be considered as debt is being shared. However, courts have seen through this and if there is no concrete evidence of the debt, the court will usually rule that the money was a gift and not a loan.

What happens when one or both spouses go bankrupt?

In some cases, the properties are not sufficient to pay off the debt. If one or both parties do not have a reliable source of income, they might be looking at bankruptcy. Indeed, financial woes are one of the major reasons for divorce, and adding debt to already struggling partners exacerbates their financial woes. When filing for bankruptcy, it is important to remember that although it can eliminate some kinds of debts, it will have an impact on the credit rating for years to come. Note bankruptcy does not wipe out joint debts and child support arrears. Some couples, in an attempt to reduce their debt, assign all assets to one party so that the party with the debt can file for bankruptcy, but creditors will not allow joint debts to be avoided this way and will investigate to see if there’s an attempt to fraudulently avoid paying off the debts.

How do I protect myself from bad debt during a divorce?

Get a divorce and family lawyer in Toronto to add additional protections into Separation Agreements. This will protect you should your spouse fail to live up to their commitment. A lawyer will advise you on your legal obligations and rights so you don’t carry your partner’s burden. It is advisable that you continue to make repayments even if your ex fails to do so due to bankruptcy or other reasons even as you seek redress from the courts because failure to do so will have an adverse effect on your credit rating. Even as you hire a lawyer to handle matters legal, you should also hire debt consolidation specialists in Torontofor advice on matters debt, including debt consolidation.

At Murray & Tobin, we are a leading divorce and family law firm specializing in all areas of family law. We encourage positive resolution as we feel this is best not only for the couple but also for the children. However, we litigate tenaciously when necessary for the best outcome for our client with regard to child custody, child support payments, debt, property division, and related divorce matters